Looks at the factors that affect the demand and supply of Oil globally; understands the functioning of OPEC, and the different oil benchmarks: crude, opec basket, west texas and dubai. Understands the reasons of the major happenings such as 1973 supply shock, 1979 energy crisis, 1980s oil glut, 1990s energy crisis and the current falling price of oil.

1. Understanding the
Major Happenings in
the Oil Market
Aakriti Agarwal
SSCBS
Delhi University

2. Understanding the Oil Market
The First Major Supply Shock 1973
The Energy Crisis of 1979
The Oil Glut of 1980s
The 1990s Energy Crisis
The Current Scenario

3. Understanding the Oil Market
The Demand Side
• Demand is increasing in the advanced, OECD economies
(approximately 66% of total world demand)
• Between 1980 and 2008, world demand increased by 40%
• The demand for oil is relatively inelastic with respect
to price, given that oil has few direct substitutes.
• Similarly, demand for oil is relatively inelastic with
respect to income in the advanced, OECD economies.
• However, income elasticity of demand in developing
economies like China and India is closer to 1.

4. Understanding the Oil Market:

5. Understanding the Oil Market:
The Supply Side
• Experts say that there are about 1.3 trillion barrels of oil in the world
(1 barrel = 42 gallons).
• Approximately 90 million barrels of oil were produced each day in
2013.
• Middle East has more than 700 billion barrels of oil in its various
fields and reserves, or roughly 56% of all the world's resources.
• Nigeria has become an important player but its history of instability
and rebel attacks severely curtail its oil production.
• The discovery of new reserves in Brazil in 2007 is a bright spot, but
the oil fields in Mexico and the North Sea are experiencing steep
declines in production.

6. Understanding the Oil Market

7. Understanding the Oil Market:
OPEC
• Formed on September 14, 1960.
• Members: Iraq, Iran, Kuwait, Saudi Arabia and Venezuela,
Algeria, Angola, Ecuador, Libya, Nigeria, Qatar and
United Arab Emirates.
• Purpose: To co-ordinate economic policies related to oil
among member nations. Ensuring that stability of oil
prices and global energy demands.
• Each member nation is allocated a production quota.
International oil companies operate independently of
OPEC, but because OPEC controls a larger percentage of
world crude oil exports, OPEC's policies impact the price of
oil worldwide.

8. Understanding the Oil Market:
Oil Benchmarks
BRENT CRUDE
OIL
•Most widely used
marker of all oil
contracts.
•Benchmark to
price European,
African and
Middle Eastern
oil that is
exported to the
West.
•Light Sweet oil
sourced from the
North Sea.
WEST TEXAS
INTERMEDIATE
•Main benchmark
for oil consumed
in the United
States.
•High quality,
light sweet oil
that is easily
refined.
DUBAI CRUDE
•Main reference
for Persian Gulf
oil delivered to
the Asian
market.
•Light sour crude
oil extracted
from Dubai.
OPEC BASKET
•Reference point
to monitor
worldwide oil
market
conditions.
•Includes, Iran
Heavy (Iran),
Basra Light
(Iraq), Bonny
Light (Nigeria)
and Arab Light
(Saudi Arabia),
etc.

9. Understanding the Oil Market
The First Major Supply Shock 1973
The Energy Crisis of 1979
The Oil Glut of 1980s
The 1990s Energy Crisis
The Current Scenario

10. The First Oil Supply Shock -1973
Egypt and Syria
attack Israel to
regain territories
lost in the June
1967 Six-Day War
US supplies Israel
with arms
The disgruntled
Arab Nations
declare an Oil
Embargo on the US
OPEC announces
5% monthly
production cuts
along with
increased prices

11. The First Oil Supply Shock -1973
Rising petrol
consumption
and inelastic
demand for Oil
causes prices
to skyrocket
Nervous
investors
pull capital
out of US
markets,
resulting in
big losses at
NYSE
OPEC
eventually
restores oil
production and
exports to the
West
The West
attempts to
curtail its
dependence on
OPEC
US steps up
efforts in
offshore oil
production,
particularly in
the Gulf of
Mexico and the
North Sea.

12. Understanding the Oil Market
The First Major Supply Shock 1973
The Energy Crisis of 1979
The Oil Glut of 1980s
The 1990s Energy Crisis
The Current Scenario

13. The Energy Crisis of 1979
Iranian
Revolution begins
in October 1977
Global oil supply
decreased by 4%
Widespread panic,
driving the price
far higher than
justified by
supply.
The price of crude
oil rose to $39.50
per barrel over
the next 12
months

14. The Energy Crisis of 1979
Price Shock
Stagflation
Large current
account deficits in
oil-importing
economies
Petrodollar
Recycling
Efforts to find
alternative sources
of energy

15. Understanding the Oil Market
The First Major Supply Shock 1973
The Energy Crisis of 1979
The Oil Glut of 1980s
The 1990s Energy Crisis
The Current Scenario

16. The Oil Glut of 1980s
Crude
Prices
Plummet to
as low as
$7 a barrel.
High prices
push measures
to improve fuel
efficiency and
reduce demand
Global
recession pulls
down
Aggregate
Demand
Discovery of
more oil fields
in the 70s OPEC fails to
lower
production
quotas and
stabilize prices
US removes
controls on oil
to make it a
Free Market

17. The Oil Glut of 1980

18. The Oil Glut of 1980
Oil Glut
Oil Consuming
Nations
Benefit
OPEC loses
unity
Serious losses
to USSR,
OPEC

19. Understanding the Oil Market
The First Major Supply Shock 1973
The Energy Crisis of 1979
The Oil Glut of 1980s
The 1990s Energy Crisis
The Current Scenario

20. The 1990s Energy Crisis

21. Understanding the Oil Market
The First Major Supply Shock 1973
The Energy Crisis of 1979
The Oil Glut of 1980s
The 1990s Energy Crisis
The Current Scenario

25. The Current Scenario
Price
Crash
Developed
countries’
flat demand
Increased
Energy
Efficiency
OPEC’s
New Tactic
China’s
Economy
Slowing
Down

26. The Current Scenario
The Upside
• Big importers enjoying windfall gains
• Fall in inflation
• Easing of monetary policies
• Fall in Fiscal and Current Account
Deficit
• Opportunity to clean up subsidy act
• Rise in global GDP
The Downside
• Nervous investors pulling out money
• Huge losses to frackers
• Petrodollar dependent economies failing
• Russia’s Rouble, Nigeria’s Niara
tumble
• Venezuela close to defaulting